How do securities regulators react to changes in market conditions? Zingales argues in ‘The Future of Securities Regulation’ that after a stock market downturn, regulation and therefore investor protection increases. Zingales refers to this as ‘crisis-driven’ regulation ‘which is indicative of a larger phenomenon that we could refer to as the “procyclicality of regulation”.’ 

Our paper examines responses by securities regulators across three countries – the US, UK and Canada – in order to contribute to the debate about the relationship between regulatory initiatives and stock market movements. Unlike Zingales, our focus is not on new legislative initiatives, but on securities enforcement. We show that in three countries following the financial crisis, there was an increase in enforcement, including total payments and number of parties sanctioned, suggesting more regulatory activity. 

We consider the intentions of securities regulators, explicit or not, as relevant when examining regulatory trends. We study how securities regulators in the three countries have used their enforcement powers following times of economic turmoil. For the purposes of our analysis, we identify the global financial crisis (GFC) as occurring between mid-2008 and early 2009, aligning with the 2009 fiscal year used by the American (SEC), Canadian (Ontario Securities Commission, or OSC), and UK regulators in their reporting. The data illustrate similar regulatory trends in each jurisdiction.   

Our empirical analysis contains two related aspects of a securities regulator’s enforcement activities.  The first is the number of investigations and prosecutions that it brings – is it actively engaged in searching out and taking action with regard to violations of securities legislation? Second, if the regulator is taking enforcement action, does it take the defendant to a hearing or does it settle? 

Our previous research into Canadian securities market regulation reveals evidence of increased action against securities law offenders after the GFC. Using the OSC as a proxy for Canadian securities enforcement levels, we found that Canadian securities law enforcement increased after the GFC; though, it decreased in subsequent years. Our data support the idea that regulatory activity follows a cyclical pattern and, following a crisis, regulatory activity increases. Unlike previous literature relating to procyclicality, we examine enforcement statistics and do so from a cross-country perspective.  We uncover similarities in enforcement generally and, to some extent, in settlements specifically. Canada appears to have gone through three periods of enforcement with a low level of sanctions imposed prior to the GFC, a large jump in the immediate aftermath of the GFC, and then a possible return to pre-GFC sanction rates.  

Our data for Canada support the idea that regulatory activity follows a cyclical pattern and, following a financial crisis, regulatory activity increases. In this paper, we add analyses relating to the United States and the United Kingdom. Our evidence suggests similar enforcement trendsduring and following the GFC. While UK enforcement activity may appear to be fairly flat or even declining following the GFC, the data suggest that this is hardly the case. In terms of the total payments ordered in enforcement actions, the UK and Canada both have been steadily on the rise since the GFC, while the US has remained higher than both jurisdictions but not steadily increasing.

While the number of actions and the level of penalties increased in each country, the UK saw the shortest-lived increase in actions and the largest jump in the level of penalties.  The combination of these two measures implies that while the US and Canada may have increased the number of parties they were taking action against, the average penalties did not increase at the rate of those in the UK. An increase in enforcement in the UK may have taken the form of an increase in a few, very serious enforcement actions as opposed to wider spread action that may have taken place in the US.  In terms of type of enforcement action, regulators in the US and the UK seemed content to obtain their penalties through either a constant or increased level of settlements.  In Canada, on the other hand, the OSC was more willing to spend its resources in taking action through hearings as opposed to settling.

In summary, in all three countries, regulators initiated and adjudicated increased numbers of enforcement actions after 2008, with regulators in the US and Canada seeing sustained high rates of action for some time afterwards while in the UK the level declined fairly quickly.  All three ordered increasingly large annual total payments of fines, penalties, and disgorgements relating to violations of securities laws. The growth in amounts was the most dramatic for Canada and the UK.  Finally, in terms of enforcement methods, regulators in the US and the UK seemed to rely slightly more on settlements in the post-crisis period while the Canadian regulator settled less.  In our ongoing research, we will focus on additional independent variables (such as industry and company size) but in the meantime, our analysis to date supports the idea of procyclical regulation in securities enforcement.

The draft paper can be accessed at SSRN.


Anita Anand is a Professor of Law and holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto.

Andrew Green is a Professor of Law at the University of Toronto.